401(k) Plan Allows Special Employer Contributions for Employees Who Pay Down Student Loans

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The IRS recently released a Private Letter Ruling which addressed issues related to an employer’s contributions to its employees’ 401(k) accounts where the employees were in the process of repaying student loans and as a result of those obligations, may not have had the financial wherewithal to make contributions to their retirement accounts.  Before going further, we must point out that PLRs are binding only on the IRS and the taxpayer which sought the ruling.  They may not be relied upon or cited as precedent by anyone else.  So, unless you were the taxpayer to whom the ruling was issued, you may not rely on it.  However, a PLR does reflect the Service’s current thinking on the issue addressed and may provide food for thought . . . .

In PLR 201833012, an employer maintained a 401(k) plan.  If an employee contributed, during a payroll period, an amount equal to at least 2% of his eligible compensation for the pay period, the employer made a matching contribution of 5% of the employee’s eligible compensation for that period.  That contribution was funded each payroll period.

The employer wanted to amend the plan to offer “a student loan-related benefit” pursuant to which, if an employee elected to participate in this employer-provided benefit program and actually made a student loan repayment (“SLR”) during a pay period equal to at least 2% of his eligible compensation for that period, the employer would make an “SLR contribution” to the employee’s 401(k) account equal to 5% of his eligible compensation for that period.  The contribution, though, would not be made until after the close of the plan year (as opposed to being funded currently).  Electing employees would continue to be entitled to make contributions to the plan–the SLR contribution would be made without regard to whether the employee contributed to the plan during the year.  In fact, if an employee elected to participate in the SLR program but did not make an SLR for a pay period equal to at least 2% of his eligible compensation, yet made an elective contribution during the pay period equal to at least 2% of his eligible compensation for the pay period, the employer would still make the same 5% matching contribution as the plan required for all other employees – – though the match would not be funded until after the close of the plan year (again, as opposed to being funded currently).

Without getting into the technical analysis, the Service ruled that the plan could be so amended  without violating the “contingent benefit” prohibitions set forth in Code Section 401(k)(4)(A) and Regulation Section 1.401(k)-1(e)(6).

So, if you’re inclined to set up such a program to assist those with student debt, this sort of plan amendment is something you might want to consider.

Please contact Mark R. Kossow, Esq. or any other member of Archer’s Business Counseling Group, in Haddonfield, N.J., at (856) 795-2121, in Princeton, NJ, at (609) 580-3700, in Hackensack, NJ, at (201) 342-6000, in Philadelphia, PA, at (215) 963-3300, or in Wilmington, DE, at (302) 777-4350.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.